Accounting’s standard setter

David Tweedie has spent the past 10 years convincing the world to speak the same accounting language.

The outgoing chairman of the International Accounting Standards Board had a vision for financial reporting where the same transaction would be accounted for in the same way around the world. He thought this would make comparisons easier for shareholders, reduce the cost of capital, and promote trade. After a decade of evangelising, the fast-talking, plain-speaking Scot is on the verge of realising his vision.

“When we started this, none of us would have thought we’d be where it is today," Sir David told The Australian Financial Review.

International standards are now used by 120 countries and accepted by G20 country leaders as a key element of post-credit crisis global regulation. They levelled the playing field, closed loopholes, and cut capital costs, but the shift was far from ­painless.

In Australia, the rules stripped billions of dollars of intangible assets from corporate balance sheets, forced finance directors to grapple with complex rules on derivatives and executive options, and made results more volatile, requiring chief executives to spend more time explaining their profits to shareholders.

“We accept the need for inter­national standards," says Peter Lewis, president of the G100, which speaks for corporate finance chiefs. “However, adoption has not been without its difficulties," says Lewis, who is also Seven Network’s chief financial officer.

Still, the acceptance of a single accounting standard is a big achievement, considering the IASB a private non-profit group, started out as a think tank funded by donations, and from its London base effectively writes law for dozens of countries, with a technical staff of 60 and a budget of £22 million ($32.8 million).

Tweedie retired as chairman on June 30, halfway through what will be the most critical year for the international accounting project.

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The United States is expected to decide whether to adopt the global rulebook by December and if it says no, 10 years of effort may well have been largely for nothing. “The next few months are critical – a ‘no’ would certainly put it back 10 years but that I think is the least likely scenario," Tweedie says during a visit to Sydney.

The IASB was created out of the old International Accounting Standards Committee, an industry body formed in the 70s to promote a global rulebook for corporate accounting. Tweedie was appointed chairman in April 2001 with a seven-year plan to rewrite the old international rules by 2008. But that timetable was halved less than a year later when the European Commission rocked the staid world of accounting standard-setters.

In March 2002, the commission said that in three years, the 7000 listed companies in the European Union would be required to publish their results using Tweedie’s rules. This wholesale adoption of a new set of standards was one of the largest financial reporting changes in European history. Europe had failed over decades to harmonise financial reporting across its capital markets and, faced with a choice of writing its own rules or moving to US standards, widely seen as legalistic and prescriptive, the Europeans banked on Tweedie.

“That was the reason they chose us," Tweedie says. “Within a month, Australia adopted, then New Zealand, and that made Asia think about it."

In Australia,
Jeffrey Lucy
, then chairman of the Financial Reporting Council, recalls the decision was “strongly influenced" by confidence that Australia would have more influence over global standards than over US rules.

Global rules also gained a break from the collapse of Enron in late 2001 and the wave of scandals and regulation that followed. “Suddenly the Americans thought ‘gee, we might not have all the answers’; suddenly, they started looking to us and we started to get rid of the differences between the two sets of standards," Tweedie says.

In its rush to meet Europe’s 2005 deadline, the board took pieces of international and US rules, rewrote some, and cut and pasted others together. One of the results caused a storm of controversy, which surprised even Tweedie – once branded “the most hated accountant in Britain" by The Scotsman newspaper when, as head of Britain’s Accounting Standards Board, he spent the 1990s cleaning up after a succession of financial scandals. “It got very, very political almost from the start," he says.

That’s because, as Tweedie likes to say, when Europe decided to adopt international standards, they did so “with great courage and in total ignorance of what was in them".

The financial instruments standard, IAS 39, caused an uproar less than a year after Europe’s decision. It required companies to report derivatives on balance sheet at fair value for the first time. This created far more volatility to accounts and reduced opportunities for obfuscation.

By July 2003, French president
Jacques Chirac
had written to
Romano Prodi
, president of the European Commission, to express concern that the standards – and particularly IAS 39–would have “nefarious consequences" on the financial stability of firms throughout Europe.

“The French banks hated it, absolutely hated it," Tweedie recalls.

“They went to the European Commission and we were summoned to the commission. The commissioner said, ‘David, if we can’t agree with the French on this we can’t accept it’. He said ‘the French will agree if you give them a compromise’.

“I said, ‘what’s the compromise’?

“He said, ‘the losses on their hedges; they don’t want to put them through the profit and loss account’.

“Where will they go?"

They wanted to record the losses on the balance sheet – as an asset.

“I said, ‘so, if I can go to a French bank and they want collateral for the loan they’re about to give me, I can give them a loss on this derivative?’

“We binned the letter and published it two days later," he says. “That was the beginning of it and it hasn’t got any better." Still, IAS39, which Tweedie admits was “a mess, frankly", increased the transparency of European banks as they had to disclose derivatives for the first time.

Later, during the 2008 credit crisis, their first big test, international standards were again lambasted by banks, which said the rules overstated losses. Tweedie says the rules were “applied very badly". If the rules, since revised, were used, “we wouldn’t have had so many assets exposed to losses".

In Australia, the change to intangible assets was fiercely opposed while the executive option rules were branded too prescriptive. The pending standard on leasing will again be hugely costly, bringing billions of dollars of liabilities onto balance sheets.

G100 member and
Woolworths
finance director
Tom Pockett
says global rules have so far focused on issues that companies didn’t regard as crucial or in need of change.

“Financial instruments has not been completed after 10 years and a disclosure framework project has not been undertaken while a rules-based standard on share-based payment has been issued, and proposals for changing lease accounting are currently being discussed," he says.

“It is hoped that in future the agenda will have a better balance."

On balance, the 10-year project receives a thumbs up.

“There would be a lot of people concerned about the volatility it has introduced," KPMG partner Kris Peach says. “As a preparer of accounts, it’s harder to explain your results to your stakeholders than it was in the past, but generally speaking, if volatility exists in your business it’s a good thing to manage it and IFRS make it more visible. But no one thinks the standards are perfect, they’re a work in progress."

Alumina Australia CFO and representative on the IASB’s advisory council
Judith Downes
says Australia benefits from standards “that are well understood in capital markets, by global investors, debt providers and analysts".

“It’s better for us to use these global standards than to develop our own."

“There is certainly an imperative for the IASB to rationalise and improve the disclosures required by IFRS to focus on the information critical to users. IFRS has however addressed some significant accounting gaps that existed previously in Australia," she adds.

But she notes international acceptability depends on the IASB having a “robust and transparent due process".

The board is reviewing its own governance. While its 15 directors have technical control over the standards, they are appointed and overseen by 22 trustees who are in turn answerable to the capital market regulators of Europe, the US and Japan. “The review is timely as it coincides with the first decade of standard setting, a new chairman, and the anticipated completion of the convergence project with the US," says Lucy, who is a trustee.

The review focuses on four areas: the foundation’s public interest mission; governance including independence and public accountability; process and procedure; and financing.

“It is being prepared on the basis of a positive US adoption decision, however if this is not forthcoming, it will be revised," he adds.

It’s hoped the governance changes will avoid a repeat of the 2008 financial crisis when accounting rules making became very political.

“It got to the situation where Europe would want something that the Americans had if it was easier in the crisis and vice versa and that became a problem," Tweedie recalls. “The politicians got involved…Sarkozy, Merkel, Berlusconi, they were all getting involved in accounting."

Surprisingly, no single country has been able to exercise much influence over the content of the standards. That is because the IASB, under Tweedie, has maintained a delicate balance between American and European interests in devising its standards.

Tweedie was replaced on July 1 by Dutch politician Hans Hoogervorst, assisted by Australian accountant Ian Mackintosh as deputy.

If the US abandons the international project, Tweedie says the whole thing may fall apart. But he is optimistic. “If they say yes, and we hope they do in November or December, that will put massive pressure on Japan to adopt and that will affect China and India."